Stockholders Retained Earnings

When it is that stockholders do not obtain any benefits from retained earnings? There is one way that this occurs and it is when management stock up cash and liquid assets way beyond any actual or future requirements of the business. The management may not have any bad intentions when doing this though. There are certain executives that obtain a sense of assurance and security from progressively piling up liquid reserves that are not needed. It seems that they do not realize they are strengthening their own sentiments of security by not giving over to the stockholder wealth that the stockholder should be able to use the way he so desires and in the way he believes is appropriate. These days there are tax laws that have a tendency of curbing this wrong so that even though it still happens, it is no longer the issue it used to be.

There is another and more of a grave method in which earnings are often times retained in the business without any important benefit to stockholders. This takes place when substandard managements are only able to get an abnormally low return on the capital that is already in business, but utilize the retained earnings just to blow up the incompetent operation instead of making it better. What usually takes place is that the management that has with time set up a bigger inefficient area over which to rule in most cases is able to do so by justifying bigger salaries for itself on the ruling that it is doing a larger job. In this situation the stockholder might end up with just a little bit of profit or none at all.

These examples however, are not likely to have an effect on the investor that follows the concepts we have gone over. Remember that a stockholder buys stock when it is outstanding and not merely because the stock is at a good cheaper price. Managements that have unproductive and substandard operations would most definitely be finding uses for extra cash and not just stocking it up somewhere.

So how does it occur that earnings that are retained in a business can be urgently needed but do not have any possibility of increasing the value of the shares of the stockholder? There are a couple different ways that this can occur in one such way is when a change in habit or public demand makes the competitive companies spend money on these “assets” that in no way make the volume of the business bigger, but that would bring about a loss of business if the expenditure had not been done. If a business decides to install a big expensive piece of equipment in the store that did not meet the competitive move might not find a lot of customers in their business. Due to the fact that for an odd reason, the accepted accounting system and the tax laws that are standing on it do not make any differentiation between assets of this sort and those that have as a matter a fact increased the value of the business, the stockholder often times believes he has not been treated the right way when earnings have not been given to him however, he is not able to see any increase in value coming to him from what was held back in the business.